Back Pay

DEFINITION of 'Back Pay'

The amount of salary and other benefits that an employee claims that he or she is owed after a wrongful termination. Back pay is typically calculated from the date of termination to the date a claim was finalized or judgment was rendered.

BREAKING DOWN 'Back Pay'

The amount of time it takes an insurance company to complete the claims process depends on the complexity of the case. In some instances, a claim may be resolved quickly, such as in the case of an automobile accident that only involved damage to the body of the vehicle. Other cases, however, may take years to fully settle. In the case of a wrongful termination claim being made by an employee, the company will be liable for the salary and benefits that the employee would have earned had he or she not been terminated.

For example, a manufacturer fired an employee on June 20, 2010. The employee felt that the termination was unwarranted, and filed a claim against the company. During the court proceedings it became apparent that the employee’s manager had a personal problem with the employee, who he fired for reasons other than professional conduct and performance. The court required the employer to reinstate the employee, with the judgment coming on January 15, 2013. The employer is liable for the back pay since June 20.

Companies may insure against the risk of owing back pay to wrongfully terminated employees through employment practices liability insurance policies. This type of insurance protects the business against claims by employees (or former employees) that their legal rights were violated. It can be purchased as a standalone insurance coverage, and also protects against the risk of claims made by employees for discrimination, sexual harassment, and other employment-related issues.

Small businesses may find themselves unable to absorb the cost of back pay to wrongfully terminated employees because their revenues are not as high as large corporations. One way to protect against this risk is to add an employment practices liability insurance endorsement to their business owner policy (BOP).